Quality control and ongoing service

The business plan should describe your philosophy and approach to quality control. You need not go into great detail, but you should indicate how you intend to avoid defects and what monitoring or inspection is built into the production process.Then, you should explain how your company will deal with products that develop defects or
that require further attention to make them operate as the customer requires. This means addressing the questions of whether you will have an in-house service department or outsource the function.

Risks and Regulations :Your business plan should explain fully any government regulations that may affect your business, such as those concerning waste disposal and worker safety. You should include copies, or at least synopses, of such regulations and describe the steps you will take to get your product or service approved for sale. If the Environmental Protection Agency requirements are applicable to your business, historical compliance records should be reviewed. In addition to federal regulations, you may also have to comply with state and local regulations and laws that affect the manufacture of your product. If the manufacturing process will be subject to health restrictions, safety regulations, special permits, or government inspections, you should explain the steps you intend to take to meet these requirements. Finally, insurance questions should be addressed. What steps have you taken to cover buildings and valuable machinery and other equipment? Are there product liability
contingencies that call for special insurance?

Identifying costs:As suggested at several points in this section, costs associated with such activities as research and development, manufacturing, quality control, insurance, and other aspects of production should be assembled. They can be noted briefly in this section, and they will become especially important in putting together the financial section of the plan.

Manufacturing and operations

You must explain how you will manufacture the product or perform the service. This means answering a number of essential questions about site selection, capacity, manufacturing processes, and suppliers. The reader will want to know how much of the process you will do yourself and how much will be contracted out to others. If your product is complex, you may need to describe key processes, the impact that technology may have on those processes or other investment needs to support production. You may also want to address how you will package and ship your product and what level of inventory you will need to carry in order to meet customer needs and expectations.Your discussion of manufacturing and operations should also cover manufacturing costs including any plans you have to reduce or control manufacturing costs.At some point, the backers will ask to see a detailed manufacturing cost breakdown. Although this information need not be included in the business plan, it should be available.

Product development issues

The following are some ways to address the subject of product development in your business plan:

Describe the R&D requirements fully. If you intend to use funding to complete research & development of your product, your plan should clearly explain this. You should include an R&D plan, budget, key development goals and milestones, and list your schedule for meeting them. The technical risks inherent in your R&D should also be fully explained and, as many new products use recent technological innovations as the cornerstone of their design, describe your reliance on any other “leading edge” technologies.

Assess competing technologies. You should discuss other technologies that will affect your
product, and consider new technologies being developed by others as well as existing technologies. Many executives make the mistake of assuming that their company is the only one working on a new technology.

Explain where the product or service will lead the company. An important area is product
evolution. Investors seldom like to back “one-product” companies. You should explain your
existing products and what new products or services may evolve from your technology, how
you will decide which of them you plan to develop, and when you expect to introduce them.

Explain what is proprietary. Investors are especially interested in knowing how you can delay or even prevent competitors from jumping in once your product or service has shown signs of success. Your business plan should discuss how you propose to protect your idea while it is in the development stage. Is your product or your technology capable of being patented, or can it be protected by copyright? If not, how do you plan to ensure the secrecy of your product or service until it can be developed and marketed? If your product can be patented, how comprehensive will these patents be?

Presenting the product

If you have already built a working model or a prototype of your product, you may want to include a photograph of it. If it is small or inexpensive enough  such as a type of food or other consumer product  you might even consider including a sample or sending one as a follow up to receipt of the business plan.If you have not built the product, it could be helpful to include an artist’s rendering or at least a conceptual diagram. Furthermore, if your product or service is derived from a new technology or an innovative application of an existing technology, you should explain this fully.In describing your product or service, keep in mind that most investors and bankers are not scientists. You should endeavor to explain your technology in lay terms. The financial backer may want to employ a consultant to examine your product, so you should have sufficient information available for this purpose or be prepared to provide it.

The need for market research

Analysis and description of the market as recommended in this chapter require complete,detailed information. That information comes from market research.The term market research suggests complex matters such as regression analysis and academic studies. More often, it is a straightforward accumulation of data available from published sources such as government or industry-association statistics and news articles, as well as from executives’ inquiries.Needed information can also come from the experience that management team members have had in working for other companies in the market. If your executives have held management positions elsewhere in your industry, they will know which companies are the key players and how buying decisions are made. The most important aspect of market research, however, is feedback from current and prospective buyers. 

How do they feel about the product or service you are offering?

What do they like, and what do they dislike? 

How likely are they to buy under various conditions and at different prices?

Getting such information, of course, requires that you speak with these customers and prospects or get them to fill out questionnaires. If you have an established business and are in contact with your customers, gathering the information you need will be easier than if you are starting a new business.In any case, the more hard data you have from current and potential buyers about their needs and preferences, the more convincing the marketing section of your business plan will be. Too often, executives avoid this part of market research and simply extrapolate from raw data to arrive at market projections. They take the total number of prospective customers, estimate that their company can secure some percentage, say 3 or 5%, as customers, and then calculate sales. This is not only unconvincing to outside readers of the plan; it is dangerous for internal planning purposes as well.Your business plan should completely, yet concisely, describe your products or services and explain how they are produced or delivered. You need not describe every nut and bolt or service provision, but you should explain what your product or service is and what need it fills. Your description should give the potential investor some idea of how your product or service differs from that of the competition. The potential investor must be convinced that your offering is more effective or efficient than that of the competition.The challenge in this section of the business plan is not so much describing the product or service in positive terms  most company executives can easily do that  as truly analyzing it in terms of features and the cost of those features.This means developing a list of the key features and making some judgments about their importance. This list often raises important questions. For example, it could be that including a newly developed electronic component in the specialty equipment you sell will improve performance slightly, but not enough to justify the increased cost and potential for breakdown. In addition, this section of the business plan must convince potential backers that you can do what you say you can do with regard to production or service delivery. They must feel confident that your company can produce the product or service described, on schedule, with high quality, and at the cost anticipated.

Understanding the market

Beyond providing an overview of the market’s composition and organization, executives must demonstrate an understanding of key market dynamics. Shifts in markets or customer behavior can leave you vulnerable. These, too, can be considered in terms of several key questions:

What motivates buying decisions? Individuals invariably purchase benefits rather than specific products or services. They buy convenience, status, and savings of time or money. They may buy a luxury car to impress friends or a computer to avoid adding personnel. Executives must be aware of the factors that determine how buying decisions are made and describe this decision-making process for the company’s product or service in the business plan.

How is the market segmented? Market segmentation is very important and frequently overlooked. You cannot assume that because a product’s price varies over a wide range, its customers are distributed evenly over that range. For example, if the price of a basic product varies among competing manufacturers from $50 to $100 per unit, you cannot assume that if you sell your product for $75, you will get one-half of the customers. Upon a closer look, you may discover that the higher-priced product ($90 - $100) accounts for only 10 percent of all sales and that the basic model with lesser capabilities and fewer enhancements ($50 - $60) accounts for the bulk of the sales. In this case, your $75 version may have very few customers. Your understanding of this principle and your description of your product’s place in its market are essential to getting financial backing.

How will your product or service be positioned in the market? Positioning begins with the crucial issue of pricing. Your price should be set according to how much the market will pay for your product or service, not how much it will cost you to manufacture, deliver or sell it. If you determine the maximum selling price of your product and then find you cannot make and distribute it at a profit, you will have to modify the product concept (e.g., Is your product so “cutting edge” that it is unclear how to price?). You will need to find a way either to sell your product for more money or to manufacture it at a lower cost. Other positioning considerations include:

•  Technology Leadership Is your company perceived as a technological leader or follower?

•  Management Style Is your company aggressive and not averse to risk, or do you plan togrow carefully and slowly?

•  Service Philosophy Have you acquired a reputation for stable and reliable service ordo you expand your business only as quickly as your service organization can support it?

•  Product Quality company try to make an adequate product that can capture a large market share by selling at Do you aim for the high-priced, high-quality end of the market, or does your a low price?

What is your defensive strategy? If your product or service threatens any of your competitors, you must consider how they might fight back and what your reaction will be. If your product represents a significant advance in technology or application, your competitors may seek to divert or at least delay your efforts until they can catch up. Many people expect large, entrenched companies to react slowly to changes in the marketplace. When their primary market is seriously threatened, however, such companies can act swiftly and commit substantial financial resources to a competitive effort.

Identifying your market

The market and competition section of the business plan should begin by describing your companies market. Essentially, this means answering several basic questions, including:

What are the trends in your industry? The market section of your business plan should begin with an assessment of the industry in which you will operate, including a description, an
analysis of trends, and an assessment of the business opportunities. Our economy is typically
divided into six general categories: service; manufacturing; technology; commerce; energy,
and health care. There is further segmentation by industry. Many businesses are formed
around the intersection of several industries making an analysis of trends that would
impact future growth dependent on several variables. The research you do here will support
your financial projections so it should be well documented. If you will be affected significantly
by regulation, you should be asking questions about the risks of increased regulation or the
opportunities that may be created by deregulation. Changes in technology have affected all
businesses and are expected to continue to do so. However these changes vary among
industries. The typical distribution channels in your industry will influence the course of
your marketing and sales plans.

What is the target market? This question is usually answered in terms of a particular category of buyer. That is, the market may be consumers between the ages of 28 and 40, or it may be upscale restaurants, or process manufacturers. Beyond that, each market has characteristics that determine customer location, and purchase and payment preferences. These should be described as they pertain to your product or service. Although you may be tempted to define your market very broadly it is usually best to be as specific as possible.


How large is the market? You need to provide some data as to how many individuals or
businesses make up the market you are trying to reach. Getting the information may require
extrapolating from various sources. For instance, if you are selling a pesticide designed for use
with peach trees, you may need to determine the number of farmers cultivating peaches as
well as the number of peach trees in order to estimate the size of the market for the pesticide.
Moreover, you must decide whether to extend your calculations from the United States to
Mexico and Central America, or limit them to your immediate region, such as the southeastern United States. Your assessment of the size of the market should also take into account market trends, demographics, geography and other key variables. You must assure the readers of your plan that the potential market will be large enough to support your business proposition. On the other hand, if your target market is too large it may be too costly to effectively serve it.

What is the competition?  Executives often neglect this question. They tend to feel that their product or service is so superior that competition won’t be significant. Underestimating the competition can be fatal. Competitors that are well established and prospering are doing so for very good reasons, and it is up to you to determine those reasons. Readers of the business plan are likely to be concerned about the competition, so this issue must be addressed directly by listing the companies that will be your primary competitors and assessing their respective strengths and weaknesses. Describe how you intend to compete with them and what you expect their response to your market plans will be. New ideas are often pursued by multiple companies simultaneously vying for first-to-market advantage. Many may also boast strong financial backing. Be sure to elucidate why you believe you will claim the edge. You should also address future competition, particularly if you believe that there are relatively low barriers to entry for potential new competitors. A concise and honest appraisal of your competition will lend a great deal of credibility to your business plan.

Other human resource issues

Other necessary details in this section include the number of employees in the company and needs to expand the workforce. Your needs may range from engineers with particular skills to skilled laboratory technicians to support product development or production, or other skilled production labor. A discussion of unique human resource programs, any union contracts, and a description of pension and incentive plans should be included. If there is a shortage of skilled manpower in your area, identify this, explaining how you plan to recruit people with critical skills. If your industry is changing rapidly then your employees will need to continue to develop their technical skills. Management should discuss which development programs are critical to the company’s success.

Out side Advisers

Your outside advisors may include a formal Board of Directors or an informal group of counselors. You may have some key consultants that can provide added credibility for your
product or service in the marketplace. Your potential investors will want to understand these
relationships and the depth and quality of these advisors.

Every day, brilliant and innovative people come up with ideas for “fantastic” products. The
ideas are worthless, however, unless there is a market for these items. Consequently, the
market section of your business plan is often the one that potential financial backers will turn
to next, after the Executive Summary.

Describing the management team

Executives frequently wonder how to best present the management team’s qualifications. The following is one approach that allows you to explain everyone’s qualifications without cluttering up the business plan:

The Synopsis Include a paragraph or half-page synopsis of each team member’s background, including relevant employment and professional experience, significant accomplishments, and educational background.

The Resume At the end of the business plan, in an appendix, provide complete and detailed resumes, giving the information necessary to allow the prospective investor to check references. Each resume should include exact employment information (positions, places employed, dates of employment, and reasons for leaving), schools attended, degrees received, and dates. The resume should also paint a personal picture of each executive for the prospective investor. You many want, for example, to include references to industry and
business affiliations, professional memberships, hobbies, and leisure time activities.

Compensation You should describe the compensation packages that you offer to the key members of the management team. Compensation packages can include salary, bonuses, profit sharing, stock ownership opportunities (options or purchase), and deferred compensation to name the most common. Be specific about the stock ownership opportunities available to each key employee. Potential investors will want to be assured that the incentives offered to key members of management are consistent with their own investment goals and
are tied to increasing the long-term value of the business.

Depending on the nature of your business

Before agreeing to finance a company, venture capitalists, private equity investors, and lenders will often conduct a thorough reference check of each key member of the team, focusing special attention on the president. If the team does not “pass muster,” you will find it difficult to raise the funds you seek. Investors will focus on the industry and technical qualifications of your executive team, their entrepreneurial experience, and integrity among other things. Your business plan should describe how the company is organized and what each individual’s duties and responsibilities are. An organization chart can help the reader. It is also helpful to explain how the individual talents of the management team contribute to realizing the company’s strategy.

This section of your plan should explain any shortcomings in your management team. Are there any critical skills your team lacks? If so, how and when will you recruit people possessing these skills? How will your company operate in the interim period without these skills in management? Your acknowledgement of the need for additional management talent demonstrates to the investors that you have carefully analyzed your management team’s abilities and your company’s needs.

Depending on the nature of your business, human resource issues beyond the management team are essential to successfully implementing your strategy. Your human resource strategy and your sources of other talent should be addressed.

Your business mission

The section of the business plan dealing with the company’s mission affords executives the opportunity to assess and articulate the overall driving force in the business. Invariably, the questions that must be answered in writing this section are difficult ones, but they provide important perspective for everyone involved.

This is really an assessment of the company’s overall approach to producing and selling its products or services, along with its goals for maximizing success. In order to grow, a company must have a distinctive value proposition (or “valuable formula”) for products or services that clearly meet customer needs better than the competition. Strategy can be expressed in terms of guiding principles or philosophy. The descriptive terms used are not nearly as important as the thought process and the considerations behind the ideas expressed. The strategy is the basis on which company activities - marketing, production, sales, and other functions - are
organized and assessed.

The Company: Past, Present , And Future

It is important for anyone assessing a business to understand its history and current status in order to project what lies ahead. The section of the business plan on the company, then, should provide a synopsis of the company’s past, present, and future. The section can be divided into
three parts:
History When was the company founded? Why was it founded? What have been its chief accomplishments? How has its direction changed? Equally important, what are the company’s failures and shortcomings? This last question is a subject executives usually prefer to avoid. While the business plan need not dwell on failures, it should acknowledge them, in the interests of balanced reporting, to give the business plan credibility. After all, every enterprise has its disappointments.

Current Status This section should summarize the company’s existing situation. What are its existing product lines? How many employees does the company have? Where does it stand in its industry and marketplace? Have there been any sales? Are sales on an upswing, level, or in a decline? Readers should have a sense of the company’s overall situation and direction as demonstrated over the previous few months.

Future This, of course, is the most difficult section to write, but it should provide a sense of where the company is headed. That is, what are its objectives and goals? Briefly, what does it plan for new markets and products?

 
Most important in writing about the company’s future is that it makes sense in terms of the history and current status. A company that projects sales increases of 20 percent annually for the coming three years does not make a very convincing case if, during the previous 10-year history, sales have never gone up more than 10 percent in a particular year.

The Management Team

The first question venture capitalists or private equity investors tend to ask when learning about a company seeking investment funds is often, “Who are the people?” The experience, talent, and integrity of the founders and the management team are of primary concern to a professional investor. In this section you should provide a quick summary, which will lead to a more detailed description in the next section.